• Adi Sunderam
  • Jeremy Stein


The Fed, the Bond Market, and Gradualism in Monetary Policy. Adi Sunderam, Jeremy Stein, February 2016, Paper. "We develop a model of monetary policy with two key features: (i) the central bank has some private information about its long-run target for the policy rate; and (ii) the central bank is averse to bond-market volatility. In this setting, discretionary monetary policy is gradualist: the central bank only adjusts the policy rate slowly in response to changes in its target. Such gradualism represents an attempt to not spook the bond market. However, this effort is unsuccessful in equilibrium, as long-term rates rationally react more to a given move in short rates when the central bank moves more gradually. The same desire to mitigate bond-market volatility can lead the central bank to lower short rates sharply when publicly-observed term premiums rise. In both cases, there is a time-consistency problem, and society would be better off with a central banker who cares less about the bond market." Link